With a focus on its continued transformation, IBM saw revenue drop and net income rise slightly in its first quarter of 2015.
Big Blue reported Q1 2015 earnings of $19.6 billion, down 12 percent from a year ago. Net income was $2.9 billion, up four percent from the same period a year ago.
IBM experienced declines in both its services and software segments, but had a very strong quarter in its systems hardware unit, where a new System z mainframe shipped during the quarter.
In addition, IBM’s strategic imperatives revenue was up more than 30 percent for the quarter. Cloud revenue was up 60 percent and business analytics revenue was up 12 percent.
“In the first quarter we had a strong start to the year,” said Ginni Rometty, IBM chairman, president and chief executive officer, in a statement. “Our strategic imperatives growth rate accelerated, demonstrating the power of our offerings in these new opportunities and contributing to improved revenue performance. Our focus on higher value through portfolio transformation and investment in key areas of the business drove continued margin expansion.”
Revenues from IBM’s software segment were down 8 percent to $5.2 billion compared with the first quarter of 2014. Revenues from IBM’s key middleware products, which include WebSphere, Information Management, Tivoli, Workforce Solutions and Rational products, were $3.5 billion, down 5 percent versus the first quarter of 2014. Operating systems revenues of $0.4 billion were down 15 percent compared with the prior-year quarter.
IBM’s combined services revenue for the quarter was $12.2 billion, down 2 percent year to year. The company ended the quarter with a total services backlog of $121 billion.
“IBM’s Q1 results were mostly in line with analysts’ expectations, though the company’s performance was hurt by currency issues — the strengthening dollar’s impact on a company with a widely global business and customers,” said Charles King, principal analyst at Pund-IT. “Though middleware revenues were disappointing, there was some good news in hardware, especially System z, which saw positive growth, and Power, where the loss was far narrower than in recent past quarters.”
Revenues for IBM’s Systems Hardware segment totaled $1.7 billion for the quarter, down 23 percent. However, systems revenues were up 30 percent, adjusting for currency and the impact of the divested System x business, from the first quarter of 2014. Revenues from System z mainframe server products increased 118 percent compared with the year-ago period, although they were up 130 percent adjusting for currency. Total delivery of System z computing power, as measured in MIPS (millions of instructions per second), increased 95 percent. Revenues from Power Systems were down 3 percent compared with the 2014 period. Revenues from System Storage decreased 8 percent.
“In March, we shipped the first z13 system and our mainframe revenue more than doubled, on MIPS shipments that were up 95 percent,” said Martin Schroeter, IBM’s CFO, during IBM’s earnings call with analysts. “Power returned to growth, leveraging strong performance in our scale-out systems. All of this is driving our shift to higher value, resulting in a higher margin and supporting targeted investments.”
IBM is continuing its transformation of moving from lower-value commodity businesses to higher-value strategic initiatives.
“We’ve been investing in our strategic imperatives, our solutions that address the opportunities in data, cloud, social, mobile and security,” Schroeter said. “These are high-value solutions. And we’re able to grow at a rate significantly faster than the market because our offerings are highly differentiated and because our core businesses provide the industry perspective and deep insight into how our clients operate.”
IBM Q1 Revenues Flat as Systems, Cloud Surge
In February, IBM showed investors that revenue across its strategic imperatives had been up 19 to 20 percent in each of the last five years. And now in the first quarter of 2015, revenue in the company’s strategic imperatives grew more than 30 percent, Schroeter said. Analytics was up more than 20 percent, social more than 40 percent, and mobile more than four times, he said.
Moreover, IBM’s cloud revenue was up over 75 percent year to year.
“On a trailing 12-month basis, our cloud revenue was $7.7 billion,” Schroeter said. “This is a demonstration of high growth in the higher-value cloud opportunities across public, private and hybrid. We had terrific performance in our cloud foundational and as-a-Service offerings. And we exited the quarter with an annual as-a-Service run rate of $3.8 billion. That’s up a billion and a half in the last year. The bulk of that growth was organic, the result of our deep insights into how our clients run their business.”
IBM’s SoftLayer cloud unit grew by solid double digits this quarter, improving sequentially and building on the company’s expanded data center capacity, IBM continued its steady progress with the opening of new centers in Montreal, Sydney, and Amsterdam.
“The best results percentage-wise in both cloud and analytics suggest that the company’s strategies in those still- emerging markets are both successful and wise,” King said. “The fact is that IBM isn’t the only IT vendor facing challenges in its core traditional markets but its proactive efforts under the leadership of CEO Ginni Rometty to gainfully explore new opportunities is working far better than most of its competitors. Overall, I consider this a solid quarter, though with admitted room for improvement. But the performance of IBM’s cloud and analytics groups suggest better results in quarters to come.”
Schroeter also noted IBM’s launch of its new IoT unit and Watson Health during the quarter.
“In 2015 we’re shifting billions of dollars of spending to data, cloud and engagement to extend our differentiation in the market,” he said. “And in the last few weeks, we’ve announced two initiatives, Internet of Things and Watson Health that will further strengthen our position as a high-value innovation company providing solutions at the intersection of business and IT.”
Jennifer Hamel, an analyst with Technology Business Research, said with the creation of the IoT business unit, IBM solidifies its value proposition around delivering fast, domain-specific business outcomes through a combination of strategy and cloud and analytics technologies. Through its $3 billion investment over four years, IBM will integrate network, software, hardware and services components to create transformational IoT solutions for commercial clients, building on existing Smarter Cities and Smarter Planet initiatives and leveraging new partnerships such as The Weather Company, Hamel said.
“Strategic engagements with key technology partners pave IBM’s way toward future earnings power in high-demand areas such as big data analytics,” Hamel said. “TBR expects IBM will continue to amass partners with access to high-value data streams in areas such as geospatial technology (or perhaps expand alliances with existing data partners such as geographic information systems vendor Esri) as it builds out the IoT unit over the next four years. Such alliances enhance the company’s growing portfolio of repeatable IP-based solution offerings, while increasing exposure of IBM’s analytics-focused consulting and systems integration (C&SI) services in GBS (Global Business Services).”